Proceedings of the 38th Hawaii International Conference on System Sciences - 2005

SOTIP as a Model for Outsourcing of Telecom Services for the Public Sector

Helena Lindskog
Department of Management and Economics
Linköping University
helli@eki.liu.se

Abstract The introduction of competition on the

The political intentions for the past 20 years have
broadly speaking been to reduce the number of publicly
owned and publicly run activities. Outsourcing is an often
applied way to cut public spending by totally or partially
privatize public activities. Telecommunications is an
obvious outsourcing candidate as it is hardly a core
activity for the public sector. Furthermore, there is today
a competitive market for telecommunications services.
At the same time it can be difficult to separate
telecommunications from other activities as every
organization’s processes and virtually all employees use
telecommunications services.
Sweden was one of the first countries in the world to
introduce full competition on the telecom market and
exposed to the new ways to procure and outsource
telecom services. A SOTIP (Swedish government Open
Telecommunications systems Interconnection Profile)
model for procurement of telecommunications services
outgoing from users’ needs was developed in order to
meet these new requirements. A buyer or outsourcer can
use SOTIP as a checklist in order to avoid mistakes by
forgetting some important requirements.
Key words: outsourcing, public procurement,
telecommunications, procurement model
1. Background
For more than one hundred years telecommunications
has been treated as a commodity provided by the
government monopoly. Telecommunications was
necessary but without any choices of service delivery. In
Sweden, PABXs (Private Automatic Branch Exchange) or
even telephones were still some 25 years ago owned by
the Swedish monopolist, the operator Televerket. Sweden
was not unique in this respect. Almost all countries in the
world had this kind of arrangement. The first parts of the
telecommunications' market to be liberated were PABXs
(in the beginning of the 1980s) and many organizations
could begin to purchase PABXs on a new more
competitive market.
telecommunications market is one of the most dramatic
and rapid economic changes that have taken place. The
explosive technical development with e.g. Internet,
wireless and broadband coincided with the de-
monopolization of the telecommunications market.
Competition gives rise to many advantages to the users
with choices of different service providers, ranges of
functions and services, pricing and billing schemes,
increased equipment assortment and contract types. The
competitive market dynamics have also introduced a rapid
development of many new services in order to
differentiate different players’ market offers. With the
steadily growing importance of telecommunications in all
aspects of our life, to choose telecom solution has not
only technical consequences but also economical. These
consequences can be difficult to foresee even for
technically skilled people.
The political intentions for the past 20 years have
broadly speaking been to reduce the number of publicly
owned and publicly run activities. Outsourcing is an often
applied way to cut public spending by totally or partially
privatize public activities. Telecommunication is an
obvious outsourcing candidate as it is hardly a core
activity for the public sector. Furthermore, there is today a
competitive market for telecommunications services.
For many years in Sweden the only way to obtain
competition and some independence from the monopolist
operator was to buy equipment such as PABXs, to build
own telecom networks and to hire staff to run telecom
services. This situation changed dramatically with the
introduction of competition on telecom market some 6-8
years ago. At that time most of the authorities had their
own telecom networks. Tradition of buying telecom
services in competition was non-existent and the pay-off
time for PABXs was 10-15 years.
In order to take full advantage of this new market
situation the management of many authorities considered
buying services instead for buying equipment and
managing own staff. As a result of these considerations
the question of structuring requirements on telecom
services outgoing from users’ needs was raised. A special
commission for procurement of telecom services was

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 Proceedings of the 38th Hawaii International Conference on System Sciences - 2005

established and one of the first tasks was to investigate if
there existed any models suitable to use for this purpose.
But since a liberated telecom market was a novelty, there
were no telecom models available. Hence, the
commission decided to develop such a model. Afterwards
the SOTIP model was adopted by the European
Commission and as EOTIP (European Open
Telecommunication systems Interconnection Profile) it is
still recommended to the member states.
2. Purpose of the article
The purpose of this article is to investigate the
relevance of SOTIP for outsourcing of telecom services in
the public sector.
- Existing structures and procedures make
efficient/effective buying strategies impossible e.g.
the public sector. In such cases outsourcing the
purchasing activity to the private sector might give
considerable gains. [2]
Peter Kraljic (1983) developed one of the most
influential and by now classical approaches to this
problem in the form of a 2:2 matrix. See figure 1. The
first functions that should be considered for outsourcing
are such that several suppliers can provide the functions
and when the function itself is not of strategic value for
the organization. In general, functions that are candidates
for outsourcing or make-or-buy decisions should be
analyzed starting from their potential risks, profit
potential and strategic value for the organization.

3. Definition of outsourcing
Figure 1. The ”Procurement Positioning” tool
It is difficult to find an all-exclusive definition of
outsourcing. Definitions span from almost any type of
purchasing through make-or-buy decision to takeover of a
function from one organization to another. For the

Profit potential/strategic value

Leverage Critical
purpose of this paper outsourcing is defined as a one-time
High
event for a specific function that previously has been a
part of an organization and afterwards becomes a part of
another organization and the relation between these
organizations is regulated by a contract. Low Routine Bottleneck

3. Procurement, make-or-buy decision and

outsourcing Low High
Risk Kraljic, 1983

Outsourcing is a result of a decision to discontinue to

”make” a specific function in-house. This change from
internal to external provision of a functional activity
makes the outsourcing decisions strategic in nature and
they are likely to have a great impact on the organization.
In addition, outsourcing decisions are many times more or
less irreversible since they involve a takeover of personal
and physical assets.
There can be several quite different reasons for
outsourcing, both rational and less “rational” ones.
Rational decision based on actual costs, core competence
and market situation can nevertheless give rise to positive
or negative consequences, which are difficult to predict.
Outsourcing of activities that were traditionally
provided by the buyer’s organization has grown
considerably over the years. [2] Frequent explanations
include:
- Stage of purchasing development reached is not
sufficient to give the organization the competitive
advantage required. Outsourcing the activity to a
more advanced strategically proactive organization.
- The existing organization structure cannot deal with
rapid change.
Following Kraljic (1983) analysis, outsourcing is
essentially the contracting out of non-core activities on a
competitive supplier market. Outsourcing is not
synonymous with procurement or purchasing.
The outsourcing decisions should not be taken on the
operational level, but involve top management. Type of
questions to be considered before starting any of
outsourcing activities:
- Do we have candidate functions for outsourcing?
- How do we select?
- How do we assess ourselves?
- Who are the potential providers?
- How do we assess them?
- What sort of relationship will we form?
- How will we manage it?
- How do we ensure efficiency?
Outsourced functions normally lead to relationships
where the vendor is providing services on a continuous
basis. [2]

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 Proceedings of the 38th Hawaii International Conference on System Sciences - 2005
4. Theoretical overview
There are three main theoretical approaches to the
phenomenon of outsourcing:
- Core competence
- Network
- Transaction cost
In addition, a general model of outsourcing will be
discussed.
4.1. Core competence
Prahalad and Hamel suggested that companies need
to understand fully their core competencies and
capabilities in order to successfully exploit their
resources.
They define these terms as a combination of
production skills and technologies. [10]
To concentrate the organization’s activities on core
competencies can be a motive for outsourcing of non-
competence activities.
Contrary to what Hancox, Martin & Hachney, Ray
(2000) say that there may be particular uncertainty about
what is core in the public sector, I would suggest that the
core competence discussion is sometimes easier to have in
the public sector environment. The reason is that all truly
core competencies in the public sector are imposed by the
constitution or other base laws and cannot be outsourced.
Examples are various authorities, audit, control,
legislation, protection of civil rights etc. However, what is
or is not an authority or belonging to the public sector’s
responsibility in general varies from country to country
and from time to time.
For many years and in most countries the
infrastructures such as electricity, railways, waterways or
telecommunications have been considered as belonging to
the government responsibility. These functions are many
times today totally de-monopolized and provided by
several competing private companies. The authority-
function is a minor part typically carried out by special
regulatory authorities.
Activities such as education, nurseries or healthcare
are in different countries considered to belong only to
public, only to private or a combination of both public
and private providers. There are regulatory and
controlling functions that “naturally” belong to the public
sector, but typically many activities and services can be
produced in both private enterprises and public owned
organizations. It is within this area where outsourcing is
typically taking place. However, quite often the decisions
to do so have been based more on belief than reality.
Sweden is an example where many services used to
be produced almost solely in the public sector and
outsourcing of them to the private sector was forbidden.
Public monopolies existed in many areas. However, even
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in such a market there always exist parts of every service
production that could either be bought from an external
service provider or produced in-house. Typical examples
are IT, telecom, cleaning, washing etc.
4.2. Network Theory
A network is generally defined as a specific type of
relation linking a defined set of persons, objects, or
events. Different types of relations identify different
networks, even when imposed on an identical set of
elements.
The set of persons, groups, organizations, objects or
events on which a network is defined may be called the
actors or nodes. The actors or nodes are connected by a
set of ties. A network analysis takes into account both the
relations that occur and those that do not exist among the
actors. The relations among actors have both content and
form.
The Network theory approach is less relevant for
public procurements including outsourcing since the
public sector is highly formalized and all contacts with
actual and potential suppliers should be on an arm-length
distance.
4.3. Transaction cost theory
Transaction cost theory (TCT), introduced by Coase
(1937) and developed principally by Williamson (1975,
1979, 1981, 1985), maintains that the organization of
economic activity depends on balancing production
economics, such as scale, against the cost of transacting.
Transactions are here the exchanges of goods or services
between economic actors, who are technologically
separate units, inside and/or outside the organization
(Williamson, 1981) [4]
This theory also provides an excellent framework for
analyzing the outsourcing option, since the essential
choice here is between using an outsourcing service
provider (a market mechanism) and providing in-house
services (an organizational hierarchy) [4]
Transaction cost drivers can increase transaction
costs as a result of human behavior and transaction
dimensions. Behind human behavior can be seen bounded
rationality or opportunism. Transaction dimensions that
can increase a transaction cost are:
- asset specificity or degree to which the transaction
will produce an asset that is dedicated to a special
purpose with poor alternative to uses
- the degree of uncertainty in the environment as it
impacts the contract and its fulfillment
- infrequency of contracting, or the infrequency with
which the two parties contract together (Williamson,
1985) [4]
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 Proceedings of the 38th Hawaii International Conference on System Sciences - 2005
The total cost consists of production costs,
governance costs such as bureaucratic costs and incentive
losses and transaction costs both before and after the
takeover of the specific function.
For the public sector in general the human behavior
factor is less important as all procurement activities are
highly regulated and controlled. Incorrectly handled
procurements and any sign of discriminatory treatment
can lead to claims for damages in juridical processes.
Some times political decisions taken at a central level and
imposed on local levels can act as a cost-driver. That
happens when central decision-makers are unable or
unwilling to take into consideration specific activities or
special situations of an authority or public organization.
Often, assets can be quite specific in the public sector
due to Organizational culture, the demands of democratic
accountability and legislative requirements all imposed
on the sampled local authorities transaction costs which
could be substantially higher than in the private sector.
[9] Many public sector organizations and local authorities,
in particular, are doubtful about the degree to which
vendors understood the “business” of local government.
[9]
It is particularly difficult to calculate and distinguish
governance costs as…the public sector contract creation
and monitoring are more difficult because of the sector’s
complexity and because there are costs associated with
bureaucracy and democracy which are hard to allocate to
specific functions. [9]
In general, there are high “ex ante” transaction costs
for the public sector as the whole process of procurement
and outsourcing in particular is based on strict rules. A
successful outsourcing should considerably reduce the “ex
post” transaction costs.
4.4. A general outsourcing model
Ulli Arnold (2000) proposed a general outsourcing
model that consists of four major elements:
- outsourcing subject
- outsourcing object
- outsourcing partner
- outsourcing design.
Outsourcing subject is the economic institution,
which plans to outsource (or not). The subject has to
make the strategic outsourcing decision. Outsourcing
objects are processes or process results, which might be
outsourced (Reichmann and Polloks, 1995). With regard
to the activities of a company we distinguish between:
- the company core (all activities which are necessarily
connected with a company’s existence
- core-close activities (directly linked with core
activities)
- core-distinct activities (supporting activities)
- disposable activities (activities with general
availability).
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From an industrial perspective, the outsourcing
object is closely linked with the degree of manufacturing
penetration. Outsourcing partners are all possible
suppliers for the activities considered for outsourcing. In
this case, supplier is a term in a wider sense. This
supplier could also be an in-house supplier, e.g. an
independent business unit within a group of firms. [1]
The outsourcing design can be a formal co-working,
co-working without formal agreement or spot
transactions.
5. The Public sector and differences between
public and private sectors
The public sector makes up a big portion in any
country. The separate organizations within the public
sector range from one person to several thousands of
employees. They cover such disparate functions and
responsibilities as care of the elderly or children, defense
and tax collection. Public organizations can be very local
as kindergartens or with the responsibility to cover the
whole nation as ministries. In most countries the public
administration has three levels: central or federal
government, regional and local governments. The
responsibilities at each level and what is or is not a public
domain vary from country to country. However, there
seems to be more similarities than differences between
different countries’ public organization due to similar
responsibilities, working areas and citizens' needs.
Possibly, the most profound difference between the
private and public sectors regards competition. The lack
of competition within the public sector is many times seen
as a major problem. However, there are also advantages.
They include the possibility for openness and exchange of
information, which are unprecedented in the private
sector. Furthermore this exchange of experiences between
different public organizations does not stop at the border.
The driving force for the development of the public
sector is to provide the best possible service at the lowest
possible price.
The public sector typically has many contacts with
citizens, companies and other organizations. Some public
organizations count all citizens, households or enterprises
as their “customers”. It is quite normal as a citizen to have
contacts with at least a dozen public organizations in a
year's time. These contacts can be daily, weekly, monthly,
quarterly, yearly or more infrequent depending on the
question and situation. Enterprises have several
obligations towards the public sector. The result is
another flow of contacts some regular and some more
sporadic.
The public sector delivers services to citizens and
enterprises. These services typically involve direct
contacts with people e.g. kindergartens, hospitals, police
or courts as well as indirect by means of communication
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with citizens, enterprises and other public organizations. bookkeeping, are similar across ministries, provinces and
The production of almost all goods has been and still is municipalities.
dominated by private companies. Different processes sometimes need similar
The number of customers to and their contacts with information: municipal social security departments and
the public sector exceed by a large amount the land registry departments both need information on
corresponding numbers for private companies. Only big inhabitants. Many public sector organizations could
banks and insurance companies may get close. Every therefore benefit from using the same information systems
citizen and every company have several different contact- or achieve considerable economies of scale. Cooperation
entrances to the public sector organizations. ca be more easily achieved in the public sector than in the
private sector, as public sector organizations do not
Table 1: Comparison between public and private compete. [6]
sectors characteristics. [17]
6. Public procurement
Private Public
Competition yes no The public sector is the biggest single buyer in any
Size of organizations 1-10.000+ 1-10.000+ country. It is buying standard goods, complicated
Geographical dispersion equipment, services ranging from cleaning offices to
- Local yes yes management consulting or mobile telephony, medicines,
- Regional yes yes building of bridges or digging of tunnels and so on.
- National yes yes Total public procurement in the EU – i.e. the
- International yes yes (few) purchases of goods, services and public works by
Production governments and public utilities - is estimated at about
- Goods yes no 16% of the Union’s GDP or €1500 billion in 2002. Its
- Services yes yes importance varies significantly between Member States
Profit driven yes no ranging between 11% and 20% of GDP. The opening up
Openness no (limited) yes of public procurement within the Internal Market has
Contacts with customers vary many increased cross-border competition and improved prices
paid by public authorities. There remains potential for
Public sector goals significant further competition in procurement markets
The public sector is distinguished from the private and for further savings for taxpayers. [3]
sector by the fact that making profit and maximizing In many cases private companies consider selling to
shareholders value is not the main objective of public the public sector more tedious, risky and costly than
sector organizations, and that the continuity of public selling to other private companies. They find it difficult to
sector organization does not depend upon outperforming be sure of getting any contracts and profitability is not
competitors. [6] always ensured. These circumstances make it difficult and
The existence and continuity of most public sector almost impossible for small or medium sized enterprises
organizations is however not self-evident…. Public sector to prepare tenders, especially as there are almost as many
organizations therefore also face a strong pressure to ways to prepare “Requests for proposals” and specifying
minimize their costs and to maximize the quality of their their requirements as there are public organizations. In
services. [6] addition, the buyers' competence and knowledge can be
…,public sector organizations have to meet demands limited. Many organizations depend on external
that most private corporations do not face. Public consultants and this expertise must also be procured.
administration involves political and legal factors that Public procurements can have the same goals as
have a value-laden component. Public bodies have as an private ones. However, public procurements are subject to
objective the performance of a socially desirable function, a different and stricter jurisdiction than private
which is not a means to generate income, but an end in procurements. The purpose is to protect companies from
itself. A citizen’s legal security and equality of rights must unfair competition and to avoid corruption and bribery.
be guaranteed. [6] The result is often that the formal requirements become
Most processes in the public sector are unique. quite extensive and lengthy.
However, they are often performed repetitively by a Contacts between buyers and bidders/prospective
number of similar public sector organizations. Examples contract winners must during the procurement process be
include that all municipalities provide social security very limited. This puts high demands on the procuring
benefits, all hospitals have similar information needs, as organization to structure the requirements of the
do schools and environmental inspection units. Secondary purchased service or equipment as a published “Request
processes, such as human resources management and for proposal” cannot be changed. Consequently, the seller

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 Proceedings of the 38th Hawaii International Conference on System Sciences - 2005
cannot change submitted proposals and only under some
special circumstances supplement with additional
information.
It is seldom customary for private companies to
reveal their needs and detailed requirements by publishing
them openly visible for everybody. It is more of choosing
from existing lists in buying staple goods or simpler
services. For more complex requirements direct contacts
can be taken or a request can be published in order to
initiate a dialogue with some selected suppliers.
But what mostly characterizes the private market is
an active role of sellers that are looking for any
opportunities to sell their products or services.
Negotiations, changes of terms, prices, requirements,
adding extra functionality, reducing the number of
licenses etc can be carried out until the last moment of
signing a contract. To reveal detailed results such as
special terms or prices is not considered to be beneficial
to either side.
This makes the public procurement process quite
different from the procurement process in the private
sector where dialogues and subsequent changes of
requirements and proposals are normal procedures.
Without understanding and taking into account these
differences it can be difficult for private enterprises even
to start bidding for governmental contracts.
All European Union countries are obliged to
implement the EC procurement directives. Underlying
legal basis for the EC procurement directives are
contained in the Treaty of Rome, March 1957. The main
principles of this Treaty that carry though to the
procurement directives aim to:
- Increase transparency of procurement procedures and
practices throughout the community
- Allow the free movement of goods, services, capital
and people between member states
- Develop effective competition for public contracts
- Standardize specifications
- Provide advance information of procurement needs to
the marketplace
The fundamental principles for public procurement
in the European Union are:
- Non-discrimination
- Equal treatment
- Transparency
- Proportionality
- Mutual recognition
7. Telecommunications industry
The telecommunications industry is an example of a
network industry. Economides (2003) lists several
features of markets with network effects such as:
- Operators depend on access to each others' network
in order to be able to distribute their services
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- Initial investments are big for a telecom operator
- After the investment has been done, there are
normally no alternative usages for it
- The more users use a network, the better it will work
for them
- There are increasing returns to scale of production
and the marginal cost is negligible
- There are increasing returns to scale in consumption
- Technical standards are of extreme importance in
order to interconnect without high additional
development cost, precondition for competition and
to avoid “lock in” situations.
- Mobile telephony is a special case as a frequency
spectrum is a limited natural resource
- A critical mass is necessary in order to get any
benefits from offered services
Network industries constitute a large part of the
world economy. Two key network industries are
telecommunications providing voice and data service
including the Internet and computer software and
hardware. Other network industries are e.g. transport
(airlines, railroads, roads, ships), news, financial services
(clearing houses, ATM networks, credit cards…) and
postal services.
Network industries are also important from a public
policy point of view as they often provide necessities.
Monopolization as well as liberalization of network
industries markets has significant social and political
implications. In order to achieve fair competition typically
requires heavy regulation since market forces alone are
not sufficient, social considerations may be in conflict
with efficiency and social and private benefits may differ
substantially.
8. Outsourcing and public procurement of
telecommunications
Adopting the general model for outsourcing by
Arnold (2000) and applying it for outsourcing of
telecommunications especially telephony services yields:
1. The outsourcing subject is a public organization. It
may be a local, regional or federal authority. Its
leadership is responsible for the decision-making. It can
be the director general and her/his staff. It can also be a
political entity e.g. at a local level.
2. The outsourcing object is a total or partial provision
of the telecommunications function.
3. The outsourcing partners are external suppliers of the
telecommunications function.
4. The outsourcing design can be specified through a
framework agreement and a contract procured, negotiated
and signed on the central level with one or few service
providers. The organizations as the outsourcing subjects
are authorized to call-off the framework contract totally or
partially according to their needs and requirements.
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Adopting the positioning matrix by Kraljic (1983),
we can note that the telecommunications market is quite
competitive with several operators that can provide a full
or partial range of telecommunications services. There are
small differences in their ability to provide different
services. The operators are more than willing to get a
contract. At the same time the strategic value of
telecommunications for most of the public organizations
is high since the public sector’s activities are highly
communicative. The service level relies on well
functioning telecommunications in order to have contacts
with citizens and enterprises as well as externally and
internally within the public sector itself.
In summary, the telecommunications function for the
public sector should be placed at low risk and high
strategic value leading to the quadrant “leverage” in
figure 1.
8.1. Core competence
The telecommunications function does seldom
belong to the public sector's core competences as it is
difficult to classify as an authority, control, legislation,
protection of civil rights or law enforcement or the likes,
which are imposed by the constitution or other legislation.
There are several functions that can equally be
provided by public or private sector and vary from
country to country such as health care or kindergartens.
These functions were often earlier provided in many
countries by the public sector and now are outsourced
and put on competition. The decision to expose these
activities to competition was a political act and based on
a presumption that a private sector is more efficient in
providing this kind of services. For the organizations that
provide this kind of services it is their very core
competence.
This type of outsourcing by public sector
organizations to private suppliers is often called
privatization. This is more fundamental than outsourcing
by private corporations, as it implies transferring
activities and resources from the public sector to the
private sector. [6]
The privatization trend was based upon implicit
ideological assumptions that market solutions are
inherently more efficient and that reducing the staffing
levels of government organizations would lead to a
cheaper and more flexible public sector.
Telecommunications is an internal support function.
Other similar functions include electricity, postal service,
IT, cleaning, washing, cooking or transports.
Traditionally, many of these functions have totally or
partially been provided inside the organizations in the
same way as in private firms. Today, they are the subject
of possible outsourcing or buy-or-make decisions. The
issue of what constitutes non-core competence is very
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relevant and it has been one of the main motives for the
outsourcing of these functions.
8.2. Transaction Costs
The Swedish governmental commission STATTEL
more than 10 years ago carried out one of the biggest
investigations on telephony costs. An inquiry was
distributed to the Swedish central government authorities.
At that time the Swedish government authorities
employed approximately 200,000 people excluding
military authorities.
The answers represented some 50,000 employees or
25% of the total number. The results showed that the
annual cost of telephony per employee was SEK 6,000.
Thus, the cost for all Swedish government authorities was
SEK 200,000 x 6,000 = SEK 1.2 bn per year. In the
beginning of the 1990s the total Swedish public sector,
i.e. central, regional and local excluding military, had
more then one million employees. Applying the same cost
per employee implies that the total annual cost for public
telephony was approximately SEK 6 bn. The assumption
for this calculation is that the cost of telephony on average
is the same independently of the type of authority.
The analysis of the cost distribution revealed
interesting and contra-intuitive findings. The cost
distribution:
Maintenanc
Traffic
17% 9% Others
5%
Equipment
Staff 37%
32%
Figure 2 Cost of the telecom for Swedish central government
The most striking result was that the cost of traffic
was just 17%. This meant that even if STATTEL could
through negotiations procure the traffic for free it would
still not be able to reduce the total cost of telephony with
the required 25%1. Until this investigation, almost all the
efforts done in order to reduce the cost of telephony were
focusing on outgoing traffic since the general view stated
that the only really important component for the cost of
telephony was the outgoing traffic.
The biggest component of the cost was equipment
consisting in PBXs (private branch exchange), telephones,
1
25% cost reduction was one of the directives to the
Commission.
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 Proceedings of the 38th Hawaii International Conference on System Sciences - 2005
answering machines and other auxiliaries. The staff
includes the internal cost of switchboard operators,
administration and technical staff. The ratio between the
cost of equipment and service for this equipment was 1:4
and indicated that the service cost was disproportionably
high.
The direct reaction of the Commission on the results
of this investigation was to initiate an immediate special
savings program for better usage of existing equipment
and revision of all service contracts, especially on
maintenance, before starting any procurement activities.
A more profound reaction was to outsource the telecom
function to an operator. One of the most important
positive effects in this case would be the possibility of
control and predictability of telecom cost.
Another way of looking at the telecom cost was to
relate them to the overall business costs and how the
investments in telecom could be used as a tool for a more
efficient public sector, i.e. to achieve a higher service
level to the citizens and enterprises at the lowest possible
price.
Citizens/Customers
Data// Business
telecom Process
Traffic
cost Re-engineering
• Equipment • Efficiency
• Maintenance
• Personnel
• Productivity
• Flexibility
Figure 3. A shift in focus – from cost to business development
(Helena Lindskog, 1995)
The benefits that data/telecom can bring to an
organization are not always obvious. Traditionally
data/telecom has been considered a cost and not as an
investment for development. In this Swedish investigation
of the telecom cost, it was shown that the cost of traffic
stands for approximately only 1/5 of the total telecom cost
and the total telecom cost is only a few percent of the
overall cost of government agencies. These relations
suggest that data/telecom should primarily be used as an
efficient tool for reducing the overall cost of business
processes, as well as a means for development of better
relationships between citizens/customers and the own
organizations. This shift of focus is illustrated in figure 3.
The main differences between the private and public
sectors are the purpose (profit/non-profit) and financing
(shareholders/taxpayers) of main activities. In general
data/telecom costs and usage are very similar and can be
treated in a similar way independently if they are used in
the private or public sectors.
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The total cost of telecom excluding IT equipment is
often approximately 1.5 – 3 % of the total business cost.
To free 10 minutes of every employee's time per day is
more or less equivalent to the total cost of
telecommunication.
Outsourcing is considered for many reasons.
However, virtually every survey finds the cost reduction is
a major objective of the outsourcing process [8]
If cost reduction is a key driver of the outsourcing
decision, then accurate cost analysis must precede any
correct decision. [8]
Asset specificity for the telecom equipment (mainly
PABXs, leased lines and telephones) in general is not
high. Only switchboard operators' services can be of high
asset specificity.
Centralized call-off types of procurement have low
frequency. At the same time there would be several call
off local contracts with relatively high frequency dealing
mainly with the specific conditions of the contracting
authority.
STATTEL encountered high uncertainty as the tasks
were of pioneering character. Neither specification nor
contract had previously been done. That led to quite high
ex ante costs including earlier mentioned investigation of
the cost structure, reference group, standardization
activities, investigation of future development in
telecommunications as well as development of a
procurement model SOTIP (Swedish government Open
Quality/Service
Competitiveness Telecommunications systems Interconnection Profile).
9. Swedish government Open
Telecommunications systems Interconnection
Profile2 (SOTIP)
The SOTIP model was formulated during the
duration of STATTEL-commission (1991-1996) that had
as a main purpose to procure telecommunications for the
Swedish public sector. The Government allocated to the
commission the task of proposing means to improve the
efficiency and service level of telecommunications within
the government administration. Agencies were to be
offered services encompassing the whole field of
telecommunication - telephony, telefax, video, electronic
mail etc. - in accordance with the following directives:
- Telephony services, which meet the needs of the
agencies in this decade.
- Widely used common telephony services based on
standards
- Simplified procedures for provision and operation by
procuring services instead of constructing and
operating networks
- Procurement with competition when possible
2
Profile is a subset of standards and options chosen for a
specific purpose or situation.
8
 Proceedings of the 38th Hawaii International Conference on System Sciences - 2005

- Improved service level to the public, between - To achieve supplier independent communications
agencies, and within agencies based on open system solutions with standardised
- Considerable cost reduction, with a goal of 25% interfaces between system components,
savings compared to present costs. - To simplify the analysis of user needs, the requirement
The timing for the establishment of STATTEL specification of services and equipment with the aid
Commission was strategically chosen in connection with of a generalised model for describing functional user
the beginning of the liberalization of the requirements for telecommunications,
telecommunication market. The Swedish government was - To create priorities for standardisation process based
committed in getting competition to this market. The on a user perspective, and the possibility to influence
establishment of the STATTEL Commission also had product development and the competitive situation.
political motives to speed up the process of getting [22]
competition on the Swedish telecommunication market. The SOTIP model identifies a number of working
By procuring telecommunication services “outsourcing” situations called end-user types. These end-user types are
(data and telephony) in an open for everybody primarily defined for the Swedish public administration
procurement, Sweden could attract foreign investors and but they are also valid for most other public
operators to establish themselves on the Swedish market. administrations as well as business organizations. Using
By enacting the Telecommunications Act in 1993 the this model, the telecommunication needs of each end-user
Swedish telecommunication market became regulated and type or group of users are analyzed based upon their role
the rules of competition were established. in the business and requirements on telecommunications
In order to take full advantage of the new situation rather than their position in the hierarchy. The end-users
and to empower the users, an idea to create a model for are divided into seven generic types: three as individual
procurement of telecommunication services outgoing end-user types and four as function end-user types.
from the users' needs was born. This model should give For each end-user type there is a key functionality.
the users maximum possibility to choose without the (See a table below).
burden of taking decisions based on detailed technical
specifications without obvious connection with an End-user Type Description Key functionality
organization’s business. The model should also allow Individual PI1 Those that Co-ordination
procurement of functions in competition and give the determine their own voice and
decision-makers a better understanding of the availability messaging
organizational and economical consequences of Filtering
PI2 Those that always Mobile access
investments in telecom services or equipment.
must be available.
The motives for developing SOTIP model can be People on move.
summarized in four points: PI3 Those that not need Messaging
- base for specification of requirements on telecom to communicate in Sharing resources
- standardization their current work
- from technical decisions by technicians to strategic Function PF1 Massive incoming ACD (Automatic
decisions by top-management calls handling. Call Call Distribution)
- from products to services. centers Co-ordination
The first version of SOTIP was published in 1995 voice-data
and consists of four main parts: PF2 Those that answer, Local mobility
filter and inform The same
Part 0 explains the background, purpose,
individual users i.e. information about
standardization and importance of telecom for the secretaries individual users
government administration as well as the future as attendants
development. In addition, the concept of end-user types is PF3 Massive outgoing Co-ordination
introduced and the classification is described. calls handling. voice-data
Part 1 describes the end-user telecom services for the Telemarketing
different end-user types on an individual level. PF4 Switchboard Co-ordination
Part 2 describes the telecom network services for Operator/Attendants Voice-data
groups of end-users. Service quality
Part 3 describes the telecom management services measurements
needed for configuration, accounting, security,
performance or error detection and recovery for an Table 2. End-user types and their key functionality.
organization. [modified 15]
The objectives stated in SOTIP are:
Additionally, one of the important motives for buying
services rather than products was to make it easier for the

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 Proceedings of the 38th Hawaii International Conference on System Sciences - 2005
decision-makers to take decisions. It also means a change
from procurement of equipment for the internal service
provider to procurement of services from an external
service provider based on SLA (Service Level
Agreement). Independently of the procurement situation,
it is important to regulate the interface between internal or
external providers and the user organization. It is a must
in case of outsourcing or buying telecom services from an
external operator.
A part that deals with the management services is
especially important in an outsourcing situation when
telecom service provision changes from internal and
mostly unregulated and external highly formalized and
regulated by contract. Management services described in
SOTIP can be used as requirements regulating the needs
of communication between an organization and its
external or internal service provider. Management
services are divided into five groups:
• Configuration
• Security
• Performance
• Fault
• Accounting
In the case of outsourcing a buyer can simply follow
all checklists and in this way avoid making mistakes by
forgetting some important requirements. SOTIP has been
tested in a few large procurements in Sweden and in the
Netherlands. It was also adopted by the European
Commission and it is used as a recommendation under
the name EOTIP (European Open Telecommunication
systems Interconnection Profile). [17]
10. Conclusions and further research
questions
Telecommunications are among the most natural
candidates for outsourcing for the public sector as it is not
a core business and there are several operators that can
provide telecommunications services.
The cost reduction is a key driver for many
outsourcing decisions. That is the case also for
outsourcing of telecommunications. However, it can
actually be beneficial to increase investments in
telecommunications, and concentrate on reducing the
price per service-unit and to use telecommunications as a
tool for business development. Such a strategy is due to
the general importance of telecommunications for further
development of any organization's activities, the relatively
low share that telecommunication costs constitute of an
organizations' overall budget and the rapid technical
development. It means that the outsourcing decision has
not only immediate but also far-reaching consequences
for the outsourcing organization for a long time in the
future.
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There are a number of further research questions.
First, it would be informative to analyze actual public and
private cases of outsourcing of telecommunications using
SOTIP model. Second, it would be of great value to find
out if there are any differences between private and public
sectors regarding outsourcing of telecommunications.
Third, SOTIP model has been used and validated in a few
big public procurements. Outsourcing of telecom services
was a part of these procurements. It would be of interest
to investigate some years after the outsourcing decision
and contract signing how well the SOTIP model
functioned and in which way it could be improved.
Fourth, it would be useful to find out if there are any
differences in implementation and usage as well as results
of outsourcing between different public authorities and in
different countries. Fifth, it would be of interest to
compare the cases of outsourcing of telecom services that
used SOTIP model and those that did not use it.
11. References
[1] Arnold, Ulli (2000) - New dimensions of outsourcing: a
combination of transaction cost economics and the core
competencies concept, European Journal of Purchasing &
Supply Management 6, p.24
[2] Baily, Peter, Farmer, David, Jessop, David & Jones, David
(1998) - Purchasing principles & management, Financial Times
pitman Publishing, 8th edition, pp 66, 283-284, 289-290
[3] Bolkestein, Frits (2004) - Public-Private Partnerships and
concessions: the players have the floor, Brussels, speech
17.05.2004
[4] Cheon, Myun J., Grover, Varun & Teng, James T.C. (1995) -
Theoretical perspectives on the outsourcing of information
systems, Journal of information Technology (1995) 10, pp 209-
214
[5] Cox, Andrew (1995) - Relational competence and strategic
procurement management, European Journal of Purchasing &
Supply Management Vol.2 No.1
[6] de Looff, L A (1996) - IS outsourcing by public sector
organisations, IFIP96 p.1-4
[7] Economides, Nicholas (2003) - Competition Policy in
Network Industries: An Introduction, Stern School of Business,
New York
[8] Ellram, Lisa M. & Maltz Arnold B. (1995) - The Use of
Total Cost of Ownership Concepts to Model the Outsourcing
Decision, The International Journal of Logistics Management,
Volume 6, Number 2, pp 55,56
[9] Hancox, Martin & Hachney, Ray (2000) - IT outsourcing:
frameworks for conceptualizing practice and perception, Info
Systems J (2000) 10, pp 217-219, 221, 223, 225, 227-228, 232
10
 Proceedings of the 38th Hawaii International Conference on System Sciences - 2005

[10] Javidan, Mansour (1998) - Core Competence: What doesIt

Mean in Practice? Long Range Planning, Vol 31, No.1,
Pergamon, Great Britain, p.60

[11] Karlsson, Magnus (1998) - The Liberalisation of

Telecommunications in Sweden Technology and Regime Change
from the 1960s to 1993, Linköping University, Department of
Technology and Social Change – Tema T

[12] Kern, Thomas, Willcocks, Leslie P. & van Heck, Eric

(2002) - The Winner’s Curse in IT Outsourcing: Strategies for
Avoiding Relational Trauma, California Management review,
vol.44 no.2 pp 47-51

[13] Kommunikationsdepartementet (1996) - Moderna

telekommunikationer åt alla, Ds 1996:39, Sweden

[14] Kraljic, P. (1983) - Purchasing must become supply

management, Harvard Business review, September-October, pp
86-94

[15] Lindskog, Helena (1996) - From reducing cost of

telecommunication to applying telecomms as a tool for business
process reengineering - an initiative from the Swedish
government administration, paper, ITS eleventh biennial
conference, Seville, Spain

[16] Lindskog, Helena (2004) - The Telecommunications Market

in Sweden from monopoly to competition, paper presented at
ABR conference, San Juan, Puerto Rico, March, 2004

[17] Lindskog, Helena (2004) - How can the private sector

benefit from the public sector’s e-procurement experiences?,
The Internet Society: Advances in learning, Commerce and
Security (K.Morgan & J.M.Spector – editors), WITPress, 2004

[18] Post- och telestyrelsen (2003) - I backspegeln, Erfarenheter

av tio år med telelagen, PTS-ER-2003:5, Sweden

[19] Statskontoret (1998) - SOTIP Updated, Stockholm, Sweden

[20] STATTEL-delegationen (1992) - Telefonikostnader inom

statsförvaltningen, Stockholm, Sweden

[21] STATTEL-delegationen (1993) - Strategy and Plan of

Action for Telephony in Government Administration, Stockholm,
Sweden

[22] STATTEL-delegationen (1995) - SOTIP – Swedish

government Open Telecommunication systems Interconnection
Profile, Version 1, 1995:13, Stockholm, Sweden

[23] STATTEL-delegationen (1995) - Telephony services for the

Swedish government administration, Specification of
requirements, K:134, 15/95, Stockholm, Sweden

[24] Telecommunications Act (1993:597), 1993, Sweden

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